A parcel moves on the conveyor belt at Amazon's logistics centre in Graben near Augsburg December 16, 2013.
Reuters/Michaela Rehle

If Amazon wants to conduct its business in India, it can do so only through an Indian subsidiary, officials said.
Reuters

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Amazon.com Inc.’s (NASDAQ:AMZN) expansion plans for India have hit a snag after the company finds itself in a tax dispute with the government in the southern Indian city of Bangalore, where its local operations are headquartered. While the e-commerce giant from Seattle has argued that it only acts as an intermediary between sellers and buyers in the country, it has been accused of violating India’s foreign direct investment, or FDI, regulations by trying to make a “backdoor entry” into the country’s retail business.

According to India’s FDI norms, overseas companies can only be involved in the multi-brand retail business through an Indian subsidiary or in a minority partnership with a local company. Amazon, which has reportedly opened three huge warehouses in Bangalore over the past year, operates what's known as the "marketplace model," which allows other companies to use Amazon's website to sell their products across the country.

The company, in a statement emailed to International Business Times Monday, said that it is "in compliance of all FDI rules" and added that it is working with local authorities to address the tax dispute.

"We understand this to be a case where the laws have not kept pace with the new-age online business models that enable a faster, convenient and nationwide access to customers for sellers, especially small and medium businesses, at significantly low costs," the company said, in the statement.

Amazon, which recently announced a plan to invest $2 billion as part of its expansion plans for India, has claimed that it is not flouting any rules as it is only collecting commissions from dealers to deliver goods to customers. However, officials at the commercial taxes department in the state government of Karnataka, of which Bangalore is capital, have stated that if Amazon wants to conduct its business, it can do so only through an Indian subsidiary, Deccan Herald, a local newspaper reported on Sunday.

While local dealers are liable to pay more than $16.5 million in Value Added Tax, or VAT, to the government, Amazon is only paying service tax on the commissions it earns for delivering the products, the officials reportedly allege, and have demanded that the company register itself as a dealer and pay VAT.

Amazon offers more than 17 million products across 28 categories in India and its latest moves in the country are considered to be the company’s attempt to take on Flipkart, India’s largest e-commerce company, which announced in July that it had raised $1 billion from investors.

"We look forward to an early resolution in order to avoid closing our local warehousing operations in Karnataka and to stay on course for bringing more investments in the state," the company said in the statement.